Question

B, an unmarried taxpayer, knows that her last dollar of income in the current year will be taxed at 10 percent. D, an unmarried taxpayer, knows that his last dollar of current year income will be taxed at 25 percent. Which of the following statements is not true taking into account the above assumptions? a. D's marginal tax rate is greater than B's. b. The value of a $2,000 IRA deduction to D will be less than the same amount contributed by B to an IRA. c. If both parties suffer a $100,000 business loss that is fully deductible, the impact of the deductible loss will be greater on D's return than on B's return. d. B will pay 10 percent of her taxable income to the government. e. D will not pay 25 percent of his taxable income to the government.

Answer 1

The value of a $2,000 IRA deduction to D will be less than the same amount contributed by B to an IRA is not true because the $ 2,000 IRA deduction will resulting in tax saving of  $ 500 ( 2,000 x 25% ) to D, whereas, the same amount will result in tax saving of $ 200 ( 2,000 x 10% ) to B, which means the value of a $2,000 IRA deduction to D will be more than the same amount contributed by B to an IRA.

So, Correct answer is option b .